Property Rights and Prosperity

Secure property rights are central to economic prosperity. It was the emergence of secure property rights that laid the foundation for the Industrial Revolution and the subsequent explosion of per capita incomes. Around the world today, it is variations in the security of property rights that play a central role in explaining differences in prosperity across nations.

A recent study by Markus Goldstein and Christopher Udry (2008) adds to our knowledge of the mechanisms by which insecure property rights wreak their havoc on living standards. The authors find that in West Africa, a system of land reallocation that reduces the security of property rights in farmland reduces investment in land improvements, and hence reduces incomes. Importantly, the paper adds to a large and growing body of evidence that the risk of expropriation is a formidable bar to human progress.

Goldstein and Udry study the economic organization of farming in Ghana, where most of the land is under the ultimate control of chiefs and is allocated locally through matrilineal descent systems of control. Precisely who within the lineage will cultivate a specific piece of land is normally the outcome of complex, often contentious negotiations. Moreover, the precise dimensions of the rights accompanying a piece of land are variable over time. For example, the act of cultivating a plot of land may—or may not—include rights to the produce from trees on the land, the right to rent out the land, or the right to pass cultivation rights on to one’s heirs. It is a system in which, for most pieces of land, property rights are both ambiguous and negotiable— indeed, some would say tenuous.

The principal uncertainties do not lie in the ownership of the product of current cultivation. In fact, as long as cultivation is ongoing, existing tenure is secure. But because fertilizer is expensive relative to the value of the land and the key crops of maize and cassava (pictured right), fallowing to allow land fertility to regenerate is the most important type of land investment in Ghana. Yet under the matrilineal system of land rights there, land that is fallow—not under current active cultivation—is subject to reallocation from one individual to others, based on the asserted economic need of the potential beneficiaries. Immediately after a growing season, the land is too exhausted for expropriation to be much of a threat. But as the fertility of land rises during the fallowing period, so too do the incentives of others seeking expropriation. The result is a compelling incentive for individuals to shorten the period of fallowing to avoid loss of the land. This reduces land productivity and, thus, overall wealth.

Within this system, there is one set of characteristics that lowers the chance that a farmer’s land will be expriated—elevated status in the social and political structure. For example, farmers whose families have been in the region longer appear to have stronger de facto property rights. Most importantly, political officeholders have markedly stronger property rights than others. For non-officeholders, there is a 40 percent chance that fallow land will be expropriated during the year; this chance is cut in half for the holders of political office. Hence, officeholders are willing to leave their land fallow for longer periods, which makes for more fertile and thus more profitable land. It will come as no surprise then that annual agricultural profits are roughly 75 higher among officeholders compared to those who do not hold political office, or that the overall wealth of political officeholders is more than double that of those who do not hold office.

institutional design that has such devastating effects on both productivity and wealth. In other work, Pande and Udry (2006) propose an explanation. Land reallocation under the matrilineal system in Ghana operates as a type of social insurance system because an important determinant of who receives the land is “need”—the asserted economic hardship facing the recipient. The system originally developed many decades ago when population and land rents were much lower and fallow periods on virtually all land were sufficiently long for full restoration of fertility. It was a time when the difference in economic value between fallowed land and land that had simply been abandoned was much lower than today. Hence the costs of the insurance system were modest when it was devised. As population and land values have grown in Ghana (and elsewhere in West Africa where similar systems are in place), the costs of land reallocation have grown substantially; they now represent a considerable impediment to a higher standard of living. It remains to be seen whether the rising costs of land reallocation will induce institutional adaptation in the region.

Many factors play a role in poverty, whether it is in West Africa or elsewhere. The factors identified by the authors of this paper cannot account for all of the deprivation we see in Ghana, but the paper fits nicely into a growing literature that makes one point abundantly clear: Without secure property rights, prosperity is a pipe dream.

REFERENCESGoldstein, Markus, and Christopher Udry. 2008. The Profits of Power: Land Rights and Agricultural Investment in Ghana. Journal of Political Economy 116(6): 981–1022.

The effect of government policy changes on the private sector has been the unifying theme that ties together Daniel K. Benjamin's broad-scale research. He not only examines the outcomes of policy changes, but also the reasons behind the modifications.Taxes, unemployment, risk assessment, and drugs have been the focus of much of Benjamin's...

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